The call calendar spread, sometimes called the bull calendar spread, is an options spread strategy that is most suited to market conditions where you believe the underlying financial instrument is due to rise within the short term, but not by too much.
Over the longer term, however, the options trader is bullish on the underlying.
Here’s how the call calendar spread is constructed:
- Sell 1 Out-of-the-money (OTM) call option with a near term expiration
- Buy 1 Out-of-the-money (OTM) call options with a longer-term expiration
The idea is to reduce your entry price by selling the shorter-term options and with the intention of riding the longer-term call options for profit.
For this strategy to work, you don’t want the price action of the underlying to spike upwards before the short term option expires. These days, with weekly options, you can come up with all sorts of interesting combinations of expiration dates to make this work for you.
Your intention is also to take advantage of accelerating time decay on the OTM short options, as expiration approaches.
Expiration months on the call calendar spread can be anything from one month apart to whatever distance into the future you wish you place your bought options. Some people are happy to close both positions for a small profit at the expiration of the short options, while others would rather ride the long option into potentially larger profits over time. It all depends on your long term view of where the price of the underlying is expected to be.